You may have seen recent news reports about contractors who got burned when the house they were working on was sold or foreclosed upon. Here are our top five steps to protecting your right to get paid on larger jobs:
Understand the “mechanic’s lien,” which allows you to place a lien against the home for the value of the work and materials provided. Pay close attention to the lien process, which likely includes specific forms and timetables; rules vary by state. Don’t wait until the job is completed to file your lien if you don’t have to. By putting everyone on notice of your lien, you may eliminate the sale or foreclosure of the property without your getting paid.
Make sure you have a good contract in place with the developer or general contractor (GC), approved by your counsel — no “handshake deals.” Ask for personal guaranties on the contract.
Run a credit check on the developer or GC to make sure they have the financial backing to pay you.
If a lender is involved, require that payments from the lender be made jointly payable to both you and the developer or GC.
Request that the developer or GC place the funds into an escrow account until you are paid for your work each month, or have a payment bond or letter of credit issued to secure the value of the work you will perform.
These steps are not always easy to accomplish, and some contractors think they may not have the bargaining power to get them done. But a number of these steps are easy, especially if you are going to have large amounts of money tied up on a job. Ask yourself if the reward of the job is worth the risk of not protecting your rights — and perhaps not getting paid.
—D.S. Berenson is the Washington, D.C., managing partner of Johanson Berenson LLP (www.homeimprovementlaw.com), a national law firm specializing in the representation of contractors and the home improvement industry. Contact him at 703.759.1055 or email@example.com.
This article is for informational purposes only and should not be construed as legal advice.